Roach: Criminal Law Concentrate, 6th edition

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Promotion of the company

Key facts

● Certain persons who are involved in the formation of a company are known as ‘promoters’.

● A promoter owes fiduciary and statutory duties to the unformed company, notably a promoter

cannot make a secret profit out of the company’s promotion.

● A promoter will usually be personally liable on a contract entered into on behalf of a company if

that company had not been incorporated at the time the contract was entered into.

Introduction

Company law is not solely concerned with what happens once a company has been created as legal

issues can arise prior to a company’s creation. This chapter looks at the legal position of persons in

the process of incorporating a company, and the legal relationship that exists between them and the

unformed company, and with any third parties who contract with the promoters or the company prior

to it being incorporated.

Promotion of the company

Persons who wish to create a company may need to undertake various activities in order for the com-

pany to be able to commence business (e.g. preparing incorporation documents, hiring or buying

premises, obtaining supplies or operating capital). Such persons, who usually go on to become the

company’s first directors, are known as ‘promoters’ of the company and their activities are closely

regulated by the law.

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 Roach: Criminal Law Concentrate, 6th edition

What is a promoter?

The law has not sought to define precisely what a promoter is, lest persons try to take themselves out

of the definition in order to avoid regulation. However, the lack of a definition can be problematic, as

determining whether or not a person is a promoter is crucial for several reasons:

• promoters owe fiduciary duties to the unformed company

• promoters can be made liable for acts engaged in on behalf of the unformed company, and

• the CA 2006 imposes a number of obligations on company promoters, especially promoters of

public companies.

Accordingly, the courts have offered guidance as to who is a promoter, with the classic statement be-

ing that of Bowen J in Whaley Bridge Calico Printing Co v Green (1880):

The term promoter is a term not of law, but of business, usefully summing up in a single word a

number of business operations familiar to the commercial world by which a company is generally

brought into existence.

Accordingly, the word ‘promoter’ is a general word that refers to those persons involved in the for-

mation of a company based upon the particular facts of the case. However, not all persons involved in

the company’s formation will be categorized as promoters. For example, persons involved in the

formation of a company by virtue of their professional duties (e.g. solicitors or accountants who pro-

vide the promoters with advice) will not be generally regarded as promoters (Re Great Wheal Pol-

gooth Co Ltd (1883)).

Looking for extra marks?

In problem questions concerning the promotion of the company, students often forget to discuss

whether the persons concerned are promoters, usually because they feel the issue is obvious. Even

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 Roach: Criminal Law Concentrate, 6th edition

where a person is clearly a promoter, you should establish this with reference to authority. For a

discussion of the authority relating to the identification of promoters, see Joseph H Gross, ‘Who is a

Company Promoter?’ (1970) 86 LQR 493.

Duties of a promoter

A promoter occupies a dominant position in relation to the unformed company and, to prevent that

position being abused, the promoter will owe the unformed company a number of duties. Two broad

categories of duty can be identified, namely the fiduciary duty and duties imposed by statute.

Fiduciary duty

A promoter occupies a fiduciary position in relation to the unformed company. Accordingly, he is not

permitted to make a profit out of the company’s promotion, unless he discloses the nature of his in-

terest and the profit made. Should he fail to disclose the profit, the transaction in question will be

voidable and so can be rescinded by the company (Erlanger v New Sombrero Phosphate Co (1878)).

If rescission fails to recover the value of the profit or if the right to rescind is lost, then the promoter

can be made to account to the company for the value of the profit (Emma Silver Mining Co v Grant

(1879)). So, for example, if upon incorporation, a promoter sells to the newly formed company an

asset that he acquired during the company’s promotion, he will not be permitted to keep the proceeds

of the sale, unless he discloses the nature of the interest and the extent of the profit made. However,

disclosure will only be valid if the persons to whom it is made are independent, as the following case

demonstrates.

Erlanger v New Sombrero Phosphate Co (1878) LR 3 App Cas 1218 (HL)

Facts: Erlanger headed a syndicate that, for £55,000, acquired a lease to certain mining rights. The

syndicate set up a company to take advantage of the mining rights. Five directors were appointed, but

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 Roach: Criminal Law Concentrate, 6th edition

two were abroad, one was the Lord Mayor of London (and so could devote little time to the

company), and the remaining two had strong links to Erlanger. Through one of the directors with

links to Erlanger, the lease was sold to the company for £110,000. Full details of the transaction were

not disclosed to the company’s members.

Held: The contract for the sale of the lease was voidable at the company’s instance. The directors

may have known the details of the transaction, but this disclosure was insufficient as the key directors

were mere puppets who, according to Lord Blackburn, had not given the transaction the ‘intelligent

judgment of an independent executive’. The company therefore rescinded the lease, and recovered

the £110,000 paid.

Accordingly, in order for disclosure to be valid, there must be an independent board of directors or an

independent body of members to hear the disclosure and, if necessary, to act upon it.

Statutory duties

In addition to the common law fiduciary duty, promoters are also subject to statutory duties. For ex-

ample, s 598 of the CA 2006 states that a non-cash asset cannot be sold to a public company by a

person who is a subscriber to the company’s memorandum, unless the non-cash asset has been inde-

pendently valued, and the members have approved the sale.

Pre-incorporation contracts

Prior to incorporation being completed, the promoters of the unformed company will likely need to

enter into contractual agreements with third parties in order to cater for the company’s future needs

(e.g. hiring premises, taking on employees, purchasing supplies or equipment). A company has the

capacity to enter into contracts with such persons, but not until it is fully incorporated (see p 51, ‘The

capacity of a company’). If the promoters attempt to contract on behalf of, or in the name of, the un-

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 Roach: Criminal Law Concentrate, 6th edition

formed company, are such pre-incorporation contracts valid or not?

Common law

Prior to the UK joining the European Economic Community (now the European Union (EU)), the

answer was to be found in case law, but it was based on determining the intent of the parties, as re-

vealed in the contract (Phonogram Ltd v Lane [1982])—a process which proved to be notoriously

difficult and which resulted in significant confusion in the law and a perception that cases in this area

could turn based on complex and technical distinctions.

Revision tip

For an example of the distinctions drawn, contrast the cases of Kelner v Baxter (1866) and

Newborne v Sensolid (Great Britain) Ltd [1954]. In Kelner, the promoter signed the contract ‘on

behalf of’ the unformed company, and it was held that a binding contract existed between the

promoter and the third party. In Newborne, the promoter signed the contract using the company’s

name and added his own signature underneath. It was held that the contract was between the

promoter and the unformed company and, as the company had no contractual capacity, no contract

existed.

Statute

As a consequence of the UK’s entry into the EU, it was obliged to implement the First EC Compa-

ny Law Directive, of which Art 7 states:

If, before a company has acquired legal personality . . . action has been carried out in its name and

the company does not assume the obligations arising from such action, the persons who acted

shall, without limit, be jointly and severally liable therefore, unless otherwise agreed.

Article 7 has been implemented by s 51(1) of the CA 2006, which states:

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A contract that purports to be made by or on behalf of a company at a time when the company has

not been formed has effect, subject to any agreement to the contrary, as one made with the person

purporting to act for the company or as agent for it, and he is personally liable on the contract ac-

cordingly.

Accordingly, a promoter is personally liable for the pre-incorporation contract in all cases to which s

51 applies. This clearly benefits third parties who contract with the promoter, as they will be able to

sue the promoter should the terms of the pre-incorporation contract be breached.

Looking for extra marks?

Section 51 makes it clear that a promoter will be personally liable for the pre-incorporation contract,

but does not indicate whether or not the third party can be liable to the promoter in the event of the

third party breaching the contract. In Braymist Ltd v Wise Finance Co Ltd [2002], it was held that a

promoter could sue a third party, but the fact that judicial clarification was required demonstrates a

flaw in the drafting of s 51 that you might wish to bring up in a possible essay question on the

effectiveness of s 51.

The courts have clearly stated that a company, once incorporated, cannot ratify or adopt a pre-

incorporation contract made on its behalf (Re Northumberland Avenue Hotel Co (1886)). The only

way that a company can take advantage of a pre-incorporation contract is for the promoter and third

party to discharge the pre-incorporation contract and the company then to enter into a new contract

with the third party in respect of the same subject matter (Howard v Patent Ivory Manufacturing Co

(1888)). This process of substituting one contract with another is known as ‘novation’.

Looking for extra marks?

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Students paying careful attention to Art 7 will note that it permits companies to ‘assume the

obligations’ of the pre-incorporation contract, whereas s 51 does not. It could accordingly be argued

that s 51 does not fully implement Art 7, and that the failure to allow companies to assume the

contract is an unnecessary restriction. Companies who wish to assume the obligations of the contract

will need to undergo the discharge procedure previously discussed, which will likely be viewed as an

undue waste of time and effort. On this, see Robert R Pennington, ‘The Validation of Pre-

Incorporation Contracts’ (2002) 23 Co Law 284, who argues that English law should allow

companies to adopt pre-incorporation contracts.

Where the promoters enter into a contract before purchasing an ‘off the shelf’ company (discussed at

p 20, ‘“Off-the-shelf” companies’), then, providing that the company existed at the time the contract

was entered into, s 51 will not apply as the company is not one that ‘has not been formed’ and a valid

contract will exist between the company and the third party. The same principle applies where a

company changes its name, but the name change has not been registered at the time the contract is

made (Oshkosh B’Gosh Inc v Dan Marbel Inc Ltd [1989]). Similarly, s 51 will not apply where a

person contracts on behalf of a company that previously existed, but no longer exists at the time the

contract was entered into (Cotronic (UK) Ltd v Dezonie [1991]).

‘Subject to any agreement to the contrary’

The imposition of liability under s 51 is ‘subject to any agreement to the contrary’, which means that

a promoter can avoid liability if he can show that he and the other party to the contract agreed that,

upon incorporation, the promoter would be released from liability and the company would enter into

a second contract with the other party on the same terms as the first contract (i.e. an agreement to no-

vate the contract was present). The agreement can be express or implied, but the courts will require

clear evidence that such an agreement exists (Bagot Pneumatic Tyre Co v Clipper Pneumatic Tyre

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 Roach: Criminal Law Concentrate, 6th edition

Co [1902]). In the absence of an express agreement, this will likely be difficult for a promoter to

prove. Simply acting as a promoter or agent of an unformed company will not be enough to infer the

existence of a contrary agreement (Phonogram Ltd v Lane [1982]).

Key cases

Case Facts Principle

Erlanger v New The promoters of a company sold the The sale of the lease was

Sombrero Phosphate company a lease. The details of the voidable. Disclosure is only

Co (1878) LR 3 App transaction were disclosed to the valid if made to an independent

Cas 1218 (HL) company’s directors, but the key body of persons, and this was

directors were nominees of the not the case here.

promoters.

Re Northumberland A promoter entered into a lease on behalf A company, once incorporated,

Avenue Hotel Co of a company that was not yet formed. cannot adopt or assume

(1886) LR 33 ChD 16 Upon incorporation of the company the obligations entered into on its

(CA) following day, the company purported to behalf at a time when it did not

adopt the lease. exist. The adoption was

therefore invalid.

Key debates

Topic Promotion of the company

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 Roach: Criminal Law Concentrate, 6th edition

Topic Promotion of the company

Author/Academic Joseph H Gross

Viewpoint Discusses the courts’ approach in determining whether or not a person is a

promoter.

Source ‘Who is a Company Promoter?’ (1970) 86 LQR 493

Topic Pre-incorporation contracts

Author/Academic Joseph Savirimuthu

Viewpoint Discusses the theories behind the common law and statutory rules relating to

pre-incorporation contracts, and provides several possible suggestions for

reform.

Source ‘Pre-Incorporation Contracts and the Problem of Corporate Fundamentalism:

Are Promoters Proverbially Profuse?’ (2003) 24 Co Law 196

Topic Pre-incorporation contracts

Author/Academic Robert R Pennington

Viewpoint Compares the common law and statutory rules relating to pre-incorporation

contracts. Argues that statutory reforms are an improvement over the common

law rules, but that companies should be able to assume pre-incorporation

contractual obligations.

Source ‘The Validation of Pre-Incorporation Contracts’ (2002) 23 Co Law 284

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 Roach: Criminal Law Concentrate, 6th edition

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